How will the market perform after the Spring Festival?

I. How Will the Market Perform After the Spring Festival?

This week, the market rose partly due to the low-cost AI model wave triggered by Deep Seek during the Spring Festival. On the other hand, the market may gradually brew a new round of policy expectations from the Spring Festival to the Two Sessions, hence the small and medium-sized stocks, as well as the computer and media sectors related to AI, performed well. We believe that Deep Seek essentially represents a phased breakthrough achieved through engineering optimization in the context of "limited resources" faced by the domestic market under U.S. GPU restrictions, which may have the following impacts on the market:

1. A decline in demand for infrastructure such as computing power may lead to a reevaluation of U.S. stock values. If the cost of AI training continues to decline beyond expectations, the demand for AI infrastructure may face a short-term decline, and companies like NVIDIA may face a reevaluation of their value. 2) A decline in computing power demand may accelerate the process of domestic substitution. Currently, domestic chips still lag significantly behind graphics card giants like NVIDIA and AMD. If the U.S. continues to impose high-tech chip embargoes on China, and algorithm improvements can significantly enhance performance, the demand for domestic chips may rise sharply. 3) Deep Seek significantly reduces model training costs, which may accelerate the landing of downstream terminals and the expansion of scenarios. Currently, several companies have announced their integration with Deep Seek, and the speed and breadth of AI empowerment may significantly increase.

It is important to note that the opportunities brought by Deep Seek are more thematic and structural, rather than "macroeconomic" and "trend-based" opportunities under a "grand narrative." First, the optimization in engineering by Deep Seek has not fundamentally changed the limitations in resources such as computing power. Additionally, the expansion of downstream scenarios and the reduction in costs brought by AI are unlikely to lead to an overall rebound in the profitability of listed companies. In terms of thematic investment opportunities, the "valuation bubble" on the computing power side in the U.S. stock market may require a certain degree of correction, and the prospects for application landing remain uncertain. This will make sectors such as media and gaming more affected by risk preferences, regulation, and liquidity before the profitability growth expectations materialize.

Regarding tariffs, in the medium term, Trump's 10% tariff may just be the beginning, and in the short term, attention should be paid to China's stance on the sale of TikTok. During the Spring Festival, U.S. President Trump signed an executive order on February 1, imposing a 10% tariff on all goods imported from China. Additionally, this executive order cancels the "minimum threshold" tariff exemption for small goods valued under $800. This tariff has no exemption list, and the average tariff rate previously imposed on Chinese products by the U.S. was 19.3%. With the addition of this round of tariffs, the total rate is around 30%.

The tariff signed on February 1 cancels the exemption for small goods valued under $800, meaning that low-priced small packages from China can no longer enter the U.S. market tax-free. However, this Friday, Trump signed the latest executive order, temporarily continuing to allow small goods to be tax-exempt. If the exemption policy for small goods is reinstated, it will have a certain impact on cross-border e-commerce platforms like TEMU. Furthermore, Trump's tariffs on countries like Mexico may have a certain impact on China's "transshipment trade," making the impact of this round of tariffs more severe compared to 2018. In 2024, China's export performance is expected to be good, becoming an important support for economic growth, while tariffs may lead to continued pressure on China's economic demand side in 2025 After the United States imposed tariffs in this round, I quickly introduced countermeasures: On February 4th, the Tariff Policy Committee of the State Council issued the "Announcement of the Tariff Policy Committee of the State Council on the Imposition of Tariffs on Certain Imported Goods Originating in the United States." The countermeasures from China this time are significantly stronger than market expectations, which may indicate that subsequent domestic stimulus policies will also be significantly stronger than market expectations. Currently, China's capabilities in self-control, military potential, and high-end manufacturing are far stronger than in 2018, which gives our policies significantly more confidence than in 2018. Therefore, the countermeasures exceed market expectations, and a "large stimulus" will not occur. We expect that after the Spring Festival, a series of domestic policies will continue to exhibit the characteristic of "strength exceeding expectations" during their implementation. Regarding the future trend of tariffs, whether there is a significant change in China's attitude towards the sale of TikTok is key to whether tariffs will escalate quickly. Trump's restoration of the tax exemption policy for small packages may be a significant positive signal.

II. Investment Suggestions

After the Spring Festival, as domestic policies and Trump's tariffs begin to be implemented, the market in February may show a "first suppression, then rise" characteristic. It is expected that after mid-February, the market will ferment the policy expectations of the Two Sessions, bringing about a new rebound.

In terms of allocation, the current viewpoint remains unchanged, focusing on state-owned enterprise dividends, the bond market, gold, and other assets. In the coming month, technology stocks, especially mid- and downstream consumer electronics and media sectors affected by Deep Seek, may remain active.

Risk Warning: Global liquidity tightening beyond expectations, the complexity of market games exceeding expectations, and the complexity of policy changes exceeding expectations, etc.

Report Body

Introduction

This week is the first week after the Spring Festival, with only three trading days from Wednesday to Friday. The A-shares welcomed a "good start," with major indices rising. The ChiNext Index rose 1.63% this week, and the CSI 1000 Index rose 4.93% this week. The market's rise this week was mainly driven by expectations, with the small and medium-sized growth sectors performing well overall.

The market's rise this week is partly driven by the low-cost AI model wave triggered by DeepSeek during the Spring Festival. On the other hand, the market may gradually brew a new round of policy expectations from the Spring Festival to the Two Sessions, hence the good performance of small and medium-sized sectors, as well as AI-related computer and media sectors.

In the Hong Kong stock market, influenced by DeepSeek, the Hang Seng Technology Index surged this week, with a cumulative increase of 9.03%. On the other hand, poor economic data from the United States during the Spring Festival led to a decline in U.S. Treasury yields, alleviating the pressure on Hong Kong stocks' liabilities and bringing about a valuation rebound.

Regarding the post-holiday trend, the current impact of DeepSeek's breakthrough and the trend of Trump's tariff policy are two key factors in the market's performance after the holiday. This week, we will conduct an in-depth discussion on these two factors.

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How Will the Market Develop After the Spring Festival?

During the Spring Festival holiday, the Chinese AI company Deep Seek's large model gained global popularity, and the capital market showed a significant response. We believe that Deep Seek essentially represents a phased breakthrough achieved by optimizing engineering technology, innovation, and the application of the open-source community in the context of "limited resources" faced by the domestic market due to U.S. GPU restrictions. Overall, Deep Seek may have the following impacts on the market:

1. A decline in demand for computing power and other infrastructure may lead to a reevaluation of U.S. stock values. Deep Seek has significantly reduced the computing power consumption for model training and inference through technologies such as structured sparse attention, mixed expert systems, and dynamic computation routing, raising market concerns about a decrease in computing power demand. As a result, on January 27, U.S. tech giants' stock prices collectively plummeted before the market opened. By the close, NVIDIA fell 16.97%, Advanced Micro Devices (AMD) dropped 6.37%, Taiwan Semiconductor Manufacturing Company (TSMC) declined 13.33%, and the Nasdaq index fell 3.07%. The recent rise in U.S. stocks has incorporated a large amount of demand driven by AI infrastructure investments; if AI training costs fall more than expected, the demand for AI infrastructure may face a short-term decline, leading to a reevaluation of companies like NVIDIA.

1. A decline in computing power demand may accelerate the process of domestic substitution. Currently, domestic chips still lag significantly behind graphics card giants like NVIDIA and AMD. If the U.S. continues to impose restrictions on high-tech chips in China, and algorithm improvements can significantly enhance performance, the demand for domestic chips may rise sharply. With the support of demand and profits, the R&D process in the domestic chip sector may continue to accelerate, enhancing competitiveness and forming a "positive feedback" loop. Influenced by the increased expectations for domestic substitution demand, this week, the A-share computer sector and domestic computing power sector performed well.

1. Deployment on the application side may accelerate, leading to an increase in terminal demand. Deep Seek has significantly reduced model training costs, which may accelerate the landing of downstream terminals and the expansion of scenarios. Currently, several companies have announced their integration with Deep Seek, and the speed and breadth of AI empowerment may significantly increase. The substantial rise in the Hang Seng Technology Index before and after the Spring Festival was mainly influenced by the increase in downstream AI demand This week, the Hang Seng Tech Index rose by more than 9%. Many internet and new energy vehicle companies announced their integration with Deep Seek, leading to a noticeable increase in AI downstream sectors such as China Literature, Kingdee International, Xiaomi, and Kingsoft Cloud.

It is important to note that the opportunities brought by Deep Seek are more thematic and structural rather than "macro" and "trend" opportunities under a grand narrative. Firstly, the optimization of Deep Seek in engineering has not changed the limitations in resources such as computing power. The open-source optimizations in engineering will also be quickly learned by major companies including Open AI, Meta, ByteDance, and Alibaba. In the long term, the demand for AI hardware may continue to grow, but the claim that Deep Seek has pierced the "bull market" of US tech stocks is overly exaggerated.

In terms of overall volume, the development of new energy vehicles, ships, and other high-end manufacturing in recent years has rapidly enhanced China's international status and national security, but the demand side and corporate profitability still face deflationary pressures. Similarly, the breakthroughs of Deep Seek and the demand side, as well as overall corporate profitability, are also "two lines." The expansion of downstream scenarios and cost reductions brought by AI are unlikely to lead to a rebound in overall profitability for listed companies. Regarding thematic investment opportunities, the "valuation bubble" on the computing side in the US stock market may need some degree of correction, while the prospects for application implementation remain uncertain. This will make sectors such as media and gaming more affected by risk appetite, regulation, and liquidity before profitability growth expectations materialize.

Regarding tariffs, in the medium term, Trump's 10% tariff may just be the beginning, and in the short term, attention should be paid to China's stance on the sale of TikTok. During the Spring Festival, on February 1, President Trump signed an executive order imposing an additional 10% tariff on all goods imported from China on top of existing tariffs. This executive order cancels the "minimum threshold" tariff exemption for small goods valued under $800. Additionally, on the 1st, Trump signed a tariff order imposing an extra 25% tariff on imported products from Canada and Mexico, and a 10% tariff on energy resources from Canada. The tariffs are set to take effect on the 4th. The White House stated that if there is retaliation against US tariffs, the US may increase the tariff intensity.

On February 3, President Trump signed an executive order suspending the imposition of tariffs on goods from Mexico and Canada, delaying the implementation until March 4, 2025. The statement indicated that if the illegal immigration and illegal drug crisis worsens, and the Canadian government fails to take sufficient measures to alleviate these crises, Trump will take necessary measures to address the situation, which may include continuing to impose tariffs Regarding this round of Trump's policy towards China, firstly, there is no exemption list for tariffs this time. The U.S. will impose an additional 10% tariff on all goods imported from China on top of the existing tariffs. The average tariff rate previously imposed on Chinese products by the U.S. reached 19.3%, and with the additional rate this time, the total tariff rate is around 30%.

Additionally, the tariffs signed on the 1st canceled the $800 exemption for small goods, meaning that low-priced small packages from China can no longer enter the U.S. market tax-free. In response to the new U.S. regulations, on February 6th, the General Administration of Customs announced that taxpayers exporting goods via overseas warehouses can declare for export tax refunds (exemptions) after the goods have cleared customs and departed. However, this Friday (February 7th), Trump signed a new executive order temporarily allowing low-cost product packages from China to continue entering the U.S. tax-free. Cross-border e-commerce platforms such as Temu under Pinduoduo, Shein, and AliExpress under Alibaba all use direct shipping models, shipping from Chinese factories to U.S. consumers, and leveraging the small package tax exemption rules to maintain low prices. If the small goods exemption policy is canceled again, it will have a certain impact on China's cross-border e-commerce.

Moreover, Trump's tariffs on Mexico and other countries may have a certain impact on China's "transshipment trade," making the impact of this round of tariffs more severe compared to 2018. In 2024, China's export performance is expected to be good, becoming an important support for economic growth, and tariffs may cause continued pressure on China's economic demand side in 2025.

After the U.S. imposed additional tariffs, China quickly introduced countermeasures: on February 4th, the Tariff Commission of the State Council issued an announcement stating that tariffs would be imposed on certain imported goods originating from the U.S., including a 15% tariff on U.S. coal and liquefied natural gas, and a 10% tariff on crude oil, agricultural machinery, large-displacement vehicles, and pickups. These additional tariffs will not be exempted.

The countermeasures from China are significantly stronger than market expectations, which may indicate that subsequent domestic stimulus policies will also be significantly stronger than market expectations. Currently, China is far stronger than in 2018 in terms of self-control, military potential, and high-end manufacturing. Therefore, the confidence in China's policies is also significantly stronger than in 2018, leading to countermeasures exceeding market expectations, and a "big stimulus" will not occur. We expect that after the Spring Festival, a series of domestic policies will continue to exhibit the characteristic of "strength exceeding expectations" during their implementation.

Regarding the future trend of tariffs, whether there is a significant change in China's attitude towards the sale of TikTok is key to whether tariffs will escalate quickly. Trump's restoration of the small package tax exemption policy may be a significant positive signal.

II Investment Suggestions

After the Spring Festival, as domestic policies and Trump's tariffs begin to be implemented, the market in February may show a characteristic of "first suppressing then rising." It is expected that after mid-February, the market will react to the policy expectations from the Two Sessions, bringing about a new rebound.

In terms of allocation, the current viewpoint remains unchanged, focusing on state-owned enterprise dividends, the bond market, gold, and other assets. In the coming month, technology stocks, especially mid- and downstream consumer electronics and media sectors affected by Deep Seek, may remain active Author of this article: Xu Chi and Zhang Wenyu from Zhongtai Securities, source: Crystal Ball for Investment, original title: “【Zhongtai Strategy | Weekly Review】How might the market perform after the Spring Festival?”, the article has been abridged.

Xu Chi: S0740519080003

Zhang Wenyu: S0740520120003

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at your own risk